New research shows that companies can discourage short sellers by offering more investor/analyst visits.
Chinese investigators sampling companies listed on the Shenzhen Stock Exchange in 2009-2019 found that a company with one site visit per year has, on average, 10 percent fewer short sales (on outstanding shares) the following year than companies that do not list shares visits.
“Visits to companies’ sites have a strong signaling effect and can ultimately reduce the likelihood of short selling,” study co-author Siyuan Yan, an assistant professor of finance at East China University of Science and Technology, told IR Magazine. “Firms confronted with short selling should pursue an active investor relations strategy aimed at reconstructing market perception and maintaining investor alignment.”
In particular, the researchers find that companies with temporarily negative revenue are least willing to offer on-site visits. “Nonetheless, these are the companies that should most intensify direct, face-to-face communication with their investors,” Yan adds. “Doing nothing just sends the wrong signal to the market.”
In addition to mitigating the effects of short selling, the researchers find that companies that offer more on-site visits receive more and better press coverage.
“While on-site visits are face-to-face communication, they also have spillover effects to information brokers in the capital market,” notes Yan. “Our result helps explain how IR activities can bring desired information to individual market participants.”
A separate group of investigators notes that Chinese analysts who conduct an on-site visit on the day of a lunar eclipse subsequently issue more pessimistic earnings forecasts. Of course, the greater the lunar coverage, the darker the prospects.
Dealing with online criticism
Done right, social media can be a powerful CSR communication tool. Its two-way nature provides the perfect medium to foster trust and build sustained shareholder support.
But this open dialectic is a double-edged sword: Social media also offer a fertile breeding ground for the opinions of others – many of them hateful. Get social media wrong and you might as well stay away from Twitter altogether.
In fact, perhaps for fear of getting burned, relatively few companies let their CSR communications play with social media. Of those who do, many are wrong. Now, two English scientists say they’ve found a surefire way to get it right and take full advantage of social media for CSR communication.
“A lot of companies use social media, but not necessarily in a conversational way,” says Anthony Grimes, Lecturer in Marketing at the University of Sheffield. “Many simply ignore negative comments on their CSR communication. We thought that if companies were more confident about what an effective response looks like, they would be more willing to get involved.”
To find the most effective way to respond to a bad online review, Grimes and his colleague Katie Dunn, Senior Lecturer in Marketing at Sheffield Hallam University, conducted an experimental study of two key characteristics of a company’s response: the speed with which it responds is created and its content – especially its “symmetry” which either implies an intention to change based on the comment of the stakeholders or defends the existing policies of the company.
“We find that highly symmetrical responses, in isolation, have little impact on audience perceptions of organizational legitimacy and CSR,” says Dunn, who makes the same observation about quick responses.
“The only type of response that will truly fully mitigate the adverse effects of negative user-generated comments is one that is both rapid and symmetrical. The strength of the additive effect was a surprise.”
The study authors recommend that IROs develop templates to facilitate the rapid construction of high-symmetry responses. “At the same time, companies need to have a really clear plan about who is responsible for identifying and responding to negative posts,” concludes Dunn.
“In this way, companies are better equipped to maximize the potential value and mitigate the significant risks of communicating their CSR activities on social media.”
This article appeared in the Fall 2022 issue of IR Magazine